BP’s Pursuit of Cost-Cutting Led to Gulf Spill, Lawyers Say

Feb. 5 (Bloomberg) -- Officers and directors of BP Plc,
pursuing cost-cutting over safety, ignored “red flags” that
could have prevented the explosion of the Deepwater Horizon
drilling rig in the Gulf of Mexico, lawyers for investors said.

The Louisiana Municipal Police Employees’ Retirement System
and other investors claim BP executives and directors breached
their fiduciary duties to the company by ignoring safety and
maintenance for years before BP’s Macondo well exploded April
20. The investors seek reforms in BP management and damages from
the executives and board members to be paid to the company.

“Despite repeated guilty pleas, warnings, employee deaths
and injuries, and criminal and civil penalties imposed on the
company by numerous federal and state regulators, the defendants
continued to systematically cut budgets,” the investors’
lawyers said in a court filing yesterday. “The defendants’
decisions and deliberate inaction caused one of the largest
environmental disasters in the history of the U.S.”

The investors’ suit, a so-called derivative claim brought
on behalf of the company, is combined with other shareholder
actions in federal court in Houston. The Louisiana pension fund
initially filed the derivative lawsuit in May, within weeks of
the explosion, and was joined by similar claims by other
investors. Lawyers for the investors filed a combined amended
complaint, adding details to their claims.

Hundreds of Lawsuits

The lawsuit is among hundreds filed in U.S. courts after
the well explosion and sinking of the Deepwater Horizon in
April, which set off the largest offshore oil spill in U.S.
history. Injury, economic loss and environmental claims are
combined before a federal judge in New Orleans.

U.S. District Judge Keith P. Ellison in Houston is
overseeing three categories of BP investor claims consolidated
in his court -- derivative suits brought on behalf of the
company, shareholder securities fraud suits claiming diminished
share value and claims by BP employees alleging losses from
mismanagement of their retirement savings funds.

The lawsuit names as defendants current and former
executives and board members including Chief Executive Officer
Robert W. Dudley, former CEO Anthony B. Hayward and Chairman
Carl-Henric Svanberg. The plaintiffs include the City of New
Orleans Employees’ Retirement System and the Southeastern
Pennsylvania Transportation Authority.

‘Reputational Harm’

The executives and board members pursued or allowed BP to
pursue a reckless course that led to the Deepwater Horizon
incident, the investor lawyers said. “In addition to the tragic
loss of life, the disaster is anticipated to cost the company at
least $40 billion in damages, permanent reputational harm and
intense government scrutiny.”

BP continued cost-cutting policies that pre-dated the
explosion at its Texas City refinery in 2005 that killed 15
workers, despite findings by multiple reports linking this
strategy to the blast, the investors’ lawyers said.

“In 2009 alone, defendants cut BP’s operational costs by
15 percent,” according to the complaint. “This reduction in
budgets and manpower further undermined the company’s ability to
operate safely as personnel were stretched even thinner and
resources that should have been devoted to maintenance,
monitoring and addressing crucial safety failures in every
aspect of the company’s operations were diverted.”

‘Next Catastrophe’

“Any reasonable director sitting on the BP board before
the Deepwater Horizon disaster would have recognized that when
it came to the next catastrophe, the question was not ‘if,’ but
rather ‘when’ and ‘how bad.’”

The lawyers contend that a series of events and regulatory
fines since the Texas City explosion should have convinced
executives and managers of the need for policy changes. BP’s
neglect of company pipelines in Alaska caused a March 2006
rupture that spilled 267,000 gallons of crude oil at Prudhoe Bay
and led to $20 million in civil and criminal fines against BP,
according to the complaint.

The company’s internal study into problems at the Alaskan
pipeline operations, by Booz Allen Hamilton in March 2007, found
that “BP’s top-down budget targets provided a ‘budget box’ in
which activities, materials and projects had to fit,” according
to the complaint.

Safety Violations

Federal safety regulators fined BP more than $5 million for
“willful” safety violations at its Ohio refinery from 2006 to
2010, the investor lawyers said. Federal regulators and
prosecutors fined BP more than $150 million in combined civil
and criminal penalties for safety and environmental violations
at the Texas City plant and the company’s failure to bring the
site into compliance after the fatal 2005 blast, according to
the complaint.

The investors are seeking reimbursement of costs for
pursuing the lawsuit, including attorneys and experts’ fees,
along with unspecified damages to be paid to BP by the
individual directors and executives for the company’s losses as
a result of the alleged breaches of fiduciary duty.

The lawsuit also asks that the defendants account for
profits and benefits, including salaries, bonuses and stock
options, obtained through their alleged misconduct. Any money
recovered would be placed in a trust for the company’s use.

The case is In re BP Shareholder Derivative Litigation,
4:10-cv-03447, U.S. District Court, Southern District of Texas
(Houston).